Big Wave Trading incorporates a Mechanical Disciplined Signal Generated System and uses a Market Model system to invest profitably in the stock and futures markets. Big Wave Trading also incorporates a strict risk management system and cuts losses immediately if a new purchase does not work in our favored direction right away.

Friday, November 23, 2007

THIS IS THE COMMENTARY THAT FOLLOWED THE CLOSE OF WEDNESDAY'S MARKET. THERE IS NO WEEKEND COMMENTARY FOLLOWING FRIDAY'S MARKET SESSION AS THE SHORT BULLISH SESSION WAS TOO IRRELEVANT TO ADD ANYTHING OF IMPORTANCE. ENJOY YOUR USUAL LONG THANKSGIVING WEEKEND. ALOHA!

November 21, 2007

Today sure was the opposite of what everyone was expecting and that is probably the exact reason we got a selloff. The market loves to do the opposite of what everyone expects and there was no doubt that everyone was expecting a pre-Thanksgiving rally. Instead they were served a big dish of frozen turkey as stocks sold off and though volume was lower it was actually decently heavy considering that this is a holiday shortened week.

The most significant technical breach that I saw today was that the Nasdaq has finally joined the rest of the indexes below its 200 day moving average. Now, while this average is a clear late signal to sell stocks, it is still a good signal in warning you to be prepared for a weak market. Bullish tapes full of big stock winners do not exist when every index is below the 200 day moving average. You can now say that we are officially in a bear if you are one of those that wait for every index to be below the 200 dma before you get bearish. You now have your signal.

After today’s showing by the market many pundits on TV were calling yet “another” bottom. Some weren’t, but there were more who were and that is the problem. You do not build bottoms when everyone is looking for one. And when talking heads from brokerage firms come out and tell you that we have great bargains and investors should start to “cost basis average” into the stock, you know we have more downside to go.

The other clear thing that should be worrisome is that everyone seems to think, for safety, that you must buy GOOG, RIMM, AAPL, and BIDU. That is a sure sign they are dumping them. To confirm this, go look at all of those stocks, you will notice all the above average volume the past two weeks. While all of this is going on the stocks have broken from their highs and are just churning around their 50 day moving averages. The problem with this is that if this was a bullish setup, volume would be low. Instead the “dumb retail” money is bidding enough for the stock and so are the bad mutual fund managers that the smart big-boys are dumping on them. Heavy volume after a selloff near the averages are not good in bear markets. It normally turns out bad.

Some other clearly obvious indicators that tell us we are not going to be putting in lows any time soon, along with all the ugly charts, is that the VIX, put/call, and investors intelligence survey all suggest there is no fear out there. Despite what some amateur market analyst are telling people.

There is simply no way to have fear out there when the put/call is only at 1.05 [.87 after Friday's session] which is below the recent highs of 1.19. The put/call today would have had to have been at least 1.25. Then the VIX is stuck around the 27 level [25.61 after Friday's session] with it being below its recent highs, also, at 31. Until I see at least a 35 reading, there is no way I can even consider a bottom. And then there is the investors intelligence survey and I believe that tells a more true picture of sentiment than the others.

If you look at your investors intelligence survey you will notice that back in August we almost had the bulls and bears cross when bulls got 41% and bears got to 39%. That was close enough to start a very bullish rally off the August lows. However, now that we see this rally fail, it becomes clear that August was not a real low-which the investors intelligence survey confirmed with it not having the bulls cross the bears. A real bottom almost always comes with this indicator ending up with more bears than bulls (ie…bulls at 35% and bears at 40%).

So if that was a good bottom and if we saw some fear back in August, then there is absolutely NO WAY we have any fear now. The investors intelligence survey currently shows 48% bulls and 27% bears. The DJIA is below its closing lows in August, ye the survey shows more bulls this time than last time and less bears this time than last time. No matter which way you cut that, it simply is not bullish for equities. There is no fear, sorry. People believe in buying the dips now. The 2005, 2006, February 2007, and August 2007 pullbacks were all called tops and people believed they were every time the media told us it was. This time the public “isn’t going to fall for it.” So they are buying the dips now. I guess after five years of a bull market, no matter what CNN tells you about how horrible the economy is, people finally believe stocks are worth buying. Too bad it is the top.

I want everyone to remember that when the stock market bottomed in November 2002 the Acc/Dis of the Nasdaq was a C+ and when it finally made its true bottom and followed-through on March 17th the Acc/Dis was an A+. So when the market bottoms you are going to have at least a C+ rating. Until you see that letter, there is simply too much distribution in the market to get any rally going. As I see it right now, on all the indexes, the ratings range from D- to D+. This is a clear sign that the sellers are in clear control and that NOBODY should be doing any “bottom calling” or knife catching with stocks.

Another clear sign that the market is in trouble and that we shouldn’t be looking for a real bottom any time too soon is that before the market even began selling off the new lows were expanding more than new highs and right now the new highs barely exist to the new lows. There were only 26 new 52-week highs compared to 596 new 52-week lows on Wednesday. Men and women….you do NOT bottom with this few new highs and this many new lows. Just like we saw before the market topped, we will have a positive divergence in breadth and new highs/new lows before we take off on the “real” follow-through. Any rally that does not have EVERYTHING that I mentioned today will not be a true bottom rally and will only be an oversold bounce in a bear market. Once you see EVERYTHING that I have mentioned today, along with strong stocks making/breaking out of solid bases with green and max green BOP, then and only then will it be safe to assume that we have seen a real bottom and that the time to go all-in has returned.

Right now, the best thing to do is to protect your capital and make money on the short side if you are experienced. There are simply too many stocks offering up too big of gains for those that have the capital to pass on. I have 57 shorts THAT ARE WORKING, so you can find many also. Since I started to short heavy this month, I have only had two or three that have been cut. Not only are my odds high on my success rate of shorts, the returns are solid and the ones that do not work are not hitting us with big losses. This market has been very kind to shorts.

However, if this is a real bear market, the real bear has not started and will not till all those over-$100 stocks start cracking. The first signs of a real top are showing up in all four (GOOG RIMM AAPL BIDU) and every single commentator on CNBC is telling us to buy them which signals to me that they are selling them. Once those babies crack the big money will be made by the best traders as the market will probably selloff very fast and give us some very quick gains. The gains that have been made in shorts have not been that big (nothing more than 35% so far) but considering how many are doing well and how many more are going to show up, it is going very well. Just think about all the traders buying the dips, not in cash, and are adding to their losses.

If you are not making money shorting, I pray that you are at least mainly on the sidelines. From what I see with the regulars in my platinum chat room, everyone is doing very well and is basically out of the market. When I go to the free chat rooms, I still see many people buying the dips and/or they are shorting the bottom tick and covering for losses. Which brings me to my next and last point.

Do not chase shorts on the downside in this market. In a bear market, there are more than just one or two historically proper chart patterns to choose from to short. You may notice, that I am now starting to short charts that are showing some new breakdown patterns that you might have not seen before. That is because you only see some of these breakout reversal breakdowns in bear markets. You don’t see them in a bull market. So make sure you constantly study where and why I am shorting stocks and notice I am not chasing. Anytime you want to short a stock, make sure it has not been down five straight days or is more than 10% away from either a 50 or 200 day moving average. You may be able to get away with chasing a long in a clear bull market (longs can run up 10000% if they want) but in a bear market (where stocks only fall 99.9%) chasing stocks down too much or too far from key resistance/moving averages is a death sentence for your money.

God bless you all for reading me; I am very thankful for all of you. I seem to enjoy sharing my trading expertise more than actually trading now and I have to thank all of you for that. Without you, I am pretty sure, trading would not bring me as much joy as it does you. I have made some big money before and am definitely going to make a lot more when I finally settle down with my family life but have to admit that the flame of passion for trading was dying out. This website has definitely brought it back. The bear market doesn’t hurt either as I know that we can finally, after a long wait, get ready to get long stocks that will give us HUGE returns with a fresh bull market. I miss stocks like TASR and TZOO. We will never get another one until after this bear market is over. But now that we have a bear market, we can finally prepare ourselves for the next TZOO and TASR. Though for them to setup we will probably have to wait for this big bear cycle to play out (could take years). But while we wait, we will have plenty of shorts to bank on and when the markets do give us those bear market rallies there will be longs that produce big gains for us. Homebuilders did great during 2000-2002. So remember, there is always a bull market somewhere.

Aloha and I will see you in the chat room. HAPPY THANKSGIVING!! God bless!!

Saturday, November 17, 2007

I expected an oversold rally starting on Friday and we got it. Intraday I said that the market could close at its HOD and it darn near did. Since the market is doing exactly what TA says it should be doing at this point, I will listen to the market and keep my shorts small from here on out until another new downtrend starts or a clear top is put in with a lot of distribution days after the Thanksgiving rally (it isn't certain but it almost always happens and the conditions are setup for it). Don't cover your shorts, if the market rallies a few hundred points here on the DJIA, and your shorts continue to move lower or do not move up. Those are the weak stocks you want to continue to hold on to. But if you have an IEX in your short port, you should be selling it all.

Today's gains came on a pickup in volume but it is always possible that the increase in volume was options related. However, it really does not matter as today's gains were under 1% so it is impossible for today to count as a follow-through day. Instead we will be entering day five of a rally attempt on Monday. I want everyone to remember that you usually do NOT get a strong market follow-through so soon after such strong selling. The best bottoms are NOT put in one month after the selling starts. So if we do get a follow-through day sometime next week make sure you see a ton of nice stocks setting up in bases or breaking out of sound bases in top industry groups.

If you do not see that, the chances that the rally will fail will be substantially higher. Even if we do continue to get a rally here, due to the oversold conditions, traders must realize that it is more than likely that rallies will be sold here as we have had a lot of selling in the indexes with very little accumulation. That is why these indexes all carry a D- to E rating in IBD. There is nothing out there doing well, except for the Defense index and Medical related stocks. This is a sign of a weak market. These industries have been doing well all year and it is probably in anticipation of a further weakening market.

As this market moves along it appears to me that we may be a little to oversold to be shorting stocks right now. However, there are few longs that are working out right now. Some of the better quality stocks recently have been IMA, VMSI, and XNPT the past three days. If you notice they are all related to the medical field. These stocks are starting to show up all over my long scans. That combined with a lot of low volume stocks is something my scans only see during rough periods of the market. Even during pullbacks the past few years there have not been a lot of these stocks on the scans. When they did show up in 2005 and 2006 they also were accompanied by a lot of stocks in shipping, oil, tech, and other leading sectors. Now it seems like medical stocks are the only stocks that once they breakout now they work.

Three out of four stocks follow the general trend of the market, so it is not smart going long here anyways. Unless your three losses are each under 5% and your one winners is always 20% or more. Since this is very doable in a bear market this is how I operate. I keep losses much tighter and risk less money. However, when stocks like IMA show up, I would rather be proven wrong than sit back and miss it. If you have seen stocks like QSC recently you know the hot money is moving into this are of the market. Breakouts will work here. However, great stocks like FNDT, EXLS, and other longs that I have taken in other industries have done very poorly. That correlates perfectly with the market.

So if you go long, make sure you go long a medical stock. Unless that chart is loaded with accumulation and max green BOP I recommend staying far away. Going short low volume rallies seems to be the right play now. When you see all these bank stocks dropping like rocks, old leading stocks top out, new lows trump new highs, and everyone on CNBC is telling you to buy the dips, I believe it is best to be cautious and raise a lot of cash.

If anything else, I don't care who you are, I would like you to have at least 25% cash. Having this cash on hand is a lot better than being long an FDX or a SBUX while you wait for the market to hit a bottom, follow-through, and then have leading stocks break out. It is never good for former leading stocks to break down all over the place in every industry. Don't get fooled into buying this rally with you going on full margin. Always wait for a follow-through and make sure real great quality stocks from tight quiet bases are breaking out.

Something makes me a bit uneasy about the market right now. I am sitting with a lot of longs that have nice patterns and look like they are going to move a lot higher. At the same time I have a lot of shorts that have been working very well and have been producing some nice gains. However, since I was so long (which allowed me to make some great gains) it has been hard to get to a point where the gains in the shorts kill the losses in the longs. However, maybe a testament to my stock picking ability recently I have had a series of days where when the market is higher my longs do great and my shorts are quiet and when the market is down my shorts do great and my longs are quiet. Since the first week, where I lost 15%, I have been able to recollect 5% of it. This in a market where most people are losing money. And I watch a lot of CNBC (like I always do when I feel we are near a top) and know that a lot of people are losing money because I hear about it constantly.

Thanks to my stock picking ability and me keeping new longs very small right now, I am no longer in the money losing camp. Even though I still have a lot of longs they are all down over 50% from where they were originally bought and my shorts have recently gotten larger. You have to realize that if 1 out of 4 stocks go up in a bear market and I pick all of the 1 out of 4 that go up and I hit a ton of the 3 out of 4 that go down, even with 25% plus cash, you are going to kill 95% of all traders and kill 99% of all mutual funds who must remain long while the market goes lower.

I know a lot of you might think that my bias to the downside is a bit too much. And I have to admit I have been wrestling with that feeling too. However, I know history, and I know that when I see defensive, medical, and low volume stocks moving higher that the market is in trouble. The SP 600 and Russell 200 always lead the market higher and lower and this time it looks no different as both small cap indexes RS lines are putting in very bearish divergences and the stocks are well below the 50 and 200 day moving averages.

The fact that all the leaders have been taken out, though, is the biggest one. It is still possible due to all the fanfare that GOOG, RIMM, AAPL, and BIDU could hit new highs. However, I believe that would bring the last of the suckers in and would be a gift to short sellers. I really hope I am wrong and I wouldn't mind being wrong so I could go long pretty charts again and make money. But I find it hard to happen when they get everything. The very last speculative group they hit was the solar stocks. When they did that I thought it was going to get bad. But FSLR has shaped up and looks good again but if you look at JASO and SPWR on an arithmetic chart you can clearly see that after a huge runup they made a VERY HUGE VOLUME blowoff. FSLR may have more to go but the other leaders are saying it is over. I could be wrong, yes. But don't forget, I HAVE BEEN A BULL SINCE OCTOBER 2002 WITH STOCKS LIKE SSYS GRMN SOHU SINA NTES AND WAS VERY LONG AFTER THE MARCH 2003 FOLLOW-THROUGH AND WAS LONG TASR AND REAPED THE HUGE NEAR 2000% GAIN IN IT.

The fact that I believe we could be topping now can not be ignored. You can go back to mauitrader.blogspot.com and read my 2004, 2005, and 2006 postings. In 2004 and 2005 I wasn't worried about any pullback at all because I ALWAYS had very green charts all over the place during the pullbacks. When I was offered a job to manage the money of a Chicago, IL based firm in 2005, the current manager believed the market was over; he was certain of it-so much so he was depressed. I told him not to worry that there were a ton of great looking bases and that the market had more to go. Eventually we parted ways. He sold his stocks...I found a 550% surprise in ERS! Not so bad!

In 2006, I believed it was very possible for us to be topping. But after the first few days of selling off, it became clear leading stocks were under no pressure. As the market started to bottom a lot of charts showed up and while some of the smartest guys on wall street and almost 100% of the commentators who work with TA on realmoney.com were boo-hooing the August move higher, I was not enjoying it but not denying that we had a lot of nice charts. Next thing you know we have HRZ (my biggest winner from that year to this year), AFSI, and TESO giving us huge high reward/low risk major gains. Those three stocks on full margin were blessings. And when this nasty bear is over, we will have more HRZ stocks one day.

In February of 2007, I believed we were topping because of China and all the weakness I started seeing in our market's internals. However, like I said earlier, AFSI and TESO came out of that so it wasn't that bad at all. This time though, we have had FNDT fail, EXLS fail, SNDA fail, ESEA fail, INXI fail, BLL fail, and many others. While all of that is going on, check out charts like IAR, ETFC, and YRCW. The play on this market right now, to make the big money, is shorting stocks.

There are a lot of technical aspects of this market that indicate that we should continue to get an oversold rally on the short-term. I did let everyone know that I expected one after Thursday's close. Some of the things that came to my attention the past few days that lead me to believe that the rally will continue were listed yesterday:

The put/call ratio did spike to 1.12 at the close today. And even though I do not see any fear in this market with the VIX being at 28, the fact that the put/call ratio did spike to 1.12 indicates that there is a little bit of fear creeping into this market. However, it is not the bottom kind of fear. That fear is a spike to 1.5.

The new highs to new lows is also another item that has recently caught my interest. When we began to selloff we consistently saw new lows over 300 on the way down with new highs staying under 100. Now we continue to have new highs around the 40-60 area but the new lows have fallen to 200 or lower the past three days. So the fact that there are not as many stocks hitting new lows despite the continuation of selling indicates that we are a bit oversold.

The two final things that make me think we are oversold is that if the S&P 500 closes down for the week this will be the first time since early 2004 that the S&P 500 has fallen for five consecutive weeks. At the same time, the percentage of stocks below their 40-day moving average is hovering right around 20% and the stocks below their 200-day moving average is around 30%. Though this is far from a “real bottom” extreme reading (10% for the 40-dma and 20% for the 200 dma), it is still very oversold. The bottom line: we should expect a bounce.

These are all the reasons that make me believe we will continue to see higher prices next week. Hopefully, the higher prices, will help my current long holdings blastoff to huge gains on huge volume so I can take some more in and at the same time keep my shorts quiet where if they do rally they do it on low volume and on a little price gain. So even with this possible oversold bounce I am not going to take in all my shorts. I have taken profits on the ones down a lot to preserve some of the gains and have eliminated the weak shorts that did not move lower. So even if we do rally I pray that most hold below the 50 and 200 day moving average. The put/call ratio did spike again to 1.19 so there is enough fear in the market where it is possible I might lose some shorts. However, if the stocks are really broken they will not bounce with the market.

If we do not get a short-covering oversold rally and we instead continue to selloff, then it will be all that much smarter to not be in longs and to be short and cash heavy. I do not think moving lower here would be bullish for the market in the long run as a bottom here would only delay the inevitable that we have been delaying since February of this year. This market has continued to weaken all year long with the market getting more and more narrow as we go along. Now it is only a few handful of leading stocks taking care of the other thousands that are falling. A bounce here will relieve the oversold pressure so that eventually the natural course of selling resumes.

I am sorry I don't have better news. I have been a bull since 2002. Where have you been? I was a bear and made a lot of money in 2000-2002. So just because we might be done with the 1000% gains in AAPL (which there still might be more to come) doesn't mean that there aren't going to be a lot of stocks to short. These old leaders have to come down eventually and if you think pure IPO crap like OZM isn't going to see the single digits you are seriously fooling yourself. They don't pump out this crap at the start of incredible bull markets. This crap comes to market when you have to get it out before it is too late and can't be brought to market cause it would crash straight down in a straight line. The crap IPOs are now being brought to market. The quality has passed in the IPO market and the stock market.

Cash is king. Aloha and I will see you in the chat room.

P.S.: If any of you reading this blog remember the Gary B. Smith TA articles from realmoney/thestreet.com back in the late 90s to about 2004 or 2005 (I can't remember) you might remember how simple and great they were. It led to GBS getting a job on FoxNews and ended up with him leaving to run money at a hedge fund. If you don't remember those articles, I recommend going back to the archives on thestreet/realmoney.com and go over them. I would love to bring them back and have been trying my best to get those articles back. I would love to write them and it would done very similar with the markets analyzed every day and 6 stocks a night. Price, volume, moving averages, and support/resistance would be the theme. If you think that you would like to see that again on realmoney.com send an email to Kristin Bentz and tell her you want to see the GBS articles again and that you want me to write them. I would love to bring those articles back. I have missed them and believe the site's TA is turning to crap. It is time to bring in someone who maybe is a little different but at least can offer stock picks that make their readers money.

Sunday, November 11, 2007

Subscribers to this site definitely were not caught by surprise when it comes to the selloff we have had the past three days. After Tuesday's market session I ended up with a TON of strong CANSLIM quality longs that appeared to signal that the market was ready for another leg up. However, the very next day, stocks reversed hard on heavier volume and many of the new buys were left looking quite mediocre. That particular action was very bearish to me and caused me to pen this right after the closing bell on Wednesday:

Screw This Market; Nasty Selloff After Such A Strong Day Is A Clear Topping Signal

November 7, 2007

I am losing my bullish bias. All my hard work yesterday was rewarded with this!!! Screw this market. Sell all laggards, cut your losses in stocks not working, take in some profits, and raise cash. This market is in for some rough times. Even if it turns around I don’t care anymore. The easy money is being made on the short side now. It is time to get rid of the bullish bias. This is the most confusing market I have EVER seen. Since 1996 I have never seen a market so screwy. Get out of your new longs and take profits. It is time to start selling. If there is nothing wrong with your longs, keep holding.

What makes all of this worse is that today I just loaded up on FNDT in my IRA. This is now the third buy in a row I have made in my IRA that has been a loser (SNDA, BLL, and now FNDT). Right now, I freaking suck, so it is best to not follow my trades unless you really like them. The easy money off the August lows has come and gone. I don’t know what the market is going to do next (probably goes lower) and with all of this volatility I do not want to be a part of it.

I have never seen such a freaking crazy market. The 2000 top has NOTHING on this wild action. If we are not topping, then damn it I really have lost all ability to read the market. Right now, it is unreadable. Anyone bullish or bearish is just asking to get punched in the face. I will continue to take both longs and shorts and will keep everything 1% or smaller of my initial equity.

I am so upset words can not even express how upset I am. Screw this market!!! Have a great evening. Aloha!

I was upset at the time because I felt like it was possible the market was going to rally hard the very next day offering up new longs. Thankfully, the caution that I suggested was rewarded as the Nasdaq sold off 4.4% the past two days. For those that listened to me and took money off the table, way to go. We missed out on some major carnage.

Now my style now forces me to hold at least 10-20% of a long all the way until it closes below the 200 dma (that is why I am still long ZNH even though I KNOW it has topped). The reason I do that is because I have been stopped out of a TON of big winners by not waiting for this event to happen. I am bringing this up because even though I am still long over 100 stocks, it is only because they are above key support and the 200 day moving average. There are about 25% of stocks in my portfolio that if I traded my old style would be complete sells. It would save me money to cut them now, I am sure. But like I just said, I guarantee, my returns would not be as strong if I did not adhere to this rule. I would have been out of MA, IHS, and many other stocks that I am instead enjoying large gains in. I have missed out on too many huge winners to not adhere by this rule.

But, if you are in a stock that no longer posses a green chart with a strong uptrend, you should probably get out of it. This market has definitely changed and this selloff is MUCH different than the rest. This is the first selloff where there is no safe haven. They have finally gotten to ALL of the leaders. There was only one group, come Friday, that did not suffer any selling, and thanks to the exhaustion gap following great earnings (earnings always look the BEST AT THE TOP) FSLR put in, it is probably safe to say that group is done. When I look at the angle of ascent of FSLR, JASO, and SPWR and then see the island reversals in all three stocks it becomes clear that these stocks now look like they have topped.

JASO is the best example of this. After a large uptrend the stock makes its biggest one day move on Thursday by putting in an exhaustion gap off of FSLR earnings. Then the very next day, it gaps lower on its largest volume ever, losing more than it gained on the gap higher, and BOP went red. This is very ugly action after such a bullish previous day. This was the last sub-sector that was holding up in the market. Now they have gotten these too.

The day before was the first day we officially saw all four leading stocks of this five-year bull market all selloff on strong volume the same day. When you look at the strong volume of the selling in all of these stocks, you can see that there have been very few days where we have seen back-to-back days of selling like this in all of our leaders. What makes this even more evident that the leaders are topping is the fact that the fifth and sixth horseman have problems too (GRMN and FSLR).

FSLR's action the past three days confirms the poor action in the leaders with everything I just listed above with the solars. But the first official leader of the bull market that started October 2002 was GRMN. Anyone who has been following GRMN recently knows that the stock has more than likely put in a real top and if you are still holding on to any shares I hope it is only 20% or less as the volume and follow-through selling after a five year bull market simply can't be ignored. This stock has topped. All of our leaders have topped. Now the next step is waiting for an area to short.

Before I go over where I want to short these leaders, first I think it is important for you all to understand why these stocks may be topping. If you look at a chart of BIDU going back to 2005 on an arithmetic chart, you will notice that the stock has pretty much been a very tight stock trending higher until early/mid October where it had its first huge volume selloff. That was the first warning that real dumping was occurring. Then after an extreme rally, the stock has rolled over on heavy volume the past two days. What this stock currently has going for it is that the stock is still above the 50 day moving average. But by looking at the recent distribution in the chart and noticing the very wide trading range recently appearing, it appears the stock is done. With the market already under distribution it isn't going to shock me when this leader falls.

RIMM is the same way since the 2002 lows as it has been in a steady uptrend. Around June this year, the uptrend starting to move at a more exponential slope and along the way RIMM did an excessive 3 for 1 split. After that, the stock rallied on lower volume (not bullish) and then had a breakout (could be exhaustion) gap on huge volume. Since the gap in June was the breakout, this is possibly an exhaustion. The rally that followed the gap was also on lower volume and now the past two days the stock has sold off on heavy volume. The two day decline of 14% on large volume is the most severe selling the stock has seen since its rally started and is a clear sign that there is not much left in this former leader. The good news, like BIDU is that it is above the 50 day moving average. So if you are long there is no reason to sell all of it but if you have not locked in any profits you better do so.

The worst looking of the leaders on the short term is GOOG. GOOG's 9% drop the past two days has come on very large volume and when you combine the two days of selling it is the heaviest volume since March 2006. If you look at a two day chart on an arithmetic scale you can see the drop is the most severe drop the stock has seen since it started trading and the drop looks very nasty on the chart. The long uptrend line from September has now been broken on huge volume which is a clear profit taking signal. Just like the other leaders this stock remains above the 50 day moving average but it too is so weak in the short term that it would not surprise me if we go right through that line. However, if you are still long some, keep holding. Until the 200 day moving average is broken there is no reason to get out of all your GOOG long.

The last leader that is holding up is AAPL. Once again, a two day chart shows the severity of the 11% drop the past two days as the candlestick bar is much longer than anything else you can see on this chart. This stock started to get roughed up in August as it had a LOT of selling hit the stock but back then the stock found strong intraday support on most of the days that the heavy selling hit it. That caused it to rally off the lows to the November highs. The problem with the rally is that the majority of it was done on lower volume. That indicated that the retail crowd was the only crowd interest in buying it up here. That low volume rally has now been met by heavy volume selling, just like most low volume rallies are. This stock is resting on the 50 day moving average and looks the weakest out of all the leaders. If you have not taken profits on this stock, you better take some profits on this one. However, until it closes below the 200 dma, I don't think you should sell all of it.

The only leader that has broken is GRMN. I am using GRMN as an example for the rest of the leaders in what I want to see before I go short. Because shorting leading stocks before they are ready to be shorted leaves you in massive pain. Just ask all the short sellers of these leading stocks in February and August. I am sure they are still feeling that pain. I know many traders who shorted some of these leaders both in February and July/August. Both times they felt it. Some think shorting GRMN right here is the right play now. I still don't think that is the case. GRMN still hasn't failed the 200 day moving average so it is still possible it could bounce here and break through the 50 day moving average and go on to new highs. While I doubt that will happen, I will tell you what I would like to see happen so that I can short this stock.

I would like to see GRMN touch the 200 day moving average and begin a rally to the downtrending 50 day moving average (if you look at the average, you will see it has turned lower). I would then like to see it bounce around the 50 day moving average for a while and/or rally above it and break back down below it. Then I will wait for a high volume selloff around the 50 and 200 day moving average. If you look at the stock DNB, you will see what I would love to see GRMN do. If GRMN breaks down just like DNB did in the middle of October, I will load up in GRMN. The other reason that I would load up is that if GRMN ends up looking like DNB, we can guarantee that the market will be still selling off like it has been recently. There has been a ton of distribution in the stock market the past few months and if the leaders start selling off I truly doubt volume will be low.

Even though I was getting bearish on Wednesday, I have to admit I still wasn't ready to abandon the bull case, as I know that it is hard to stop bullish momentum. But there were two stocks on Thursday that gave me "hope" that the bull was going to continue. One was the stock you read about earlier called FNDT. The other one was EXLS.

FNDT was not a perfect chart at all as the stock did not have two straight months of max BOP. But it did the second best thing which is to bounce off the 50 day moving average, put in a very bullish intraday reversal, breakout to or near recent highs on extremely strong volume, and do it with BOP going max green. Well FNDT did the latter and three days later was looking great as the stock was breaking out to new highs and closing at its HOD with BOP still max green. So obviously the stock deserved to be in my IRA. I only put what I consider the best looking charts in there. I have to admit I normally want a lot more max green BOP but I was getting very trigger happy in this market as the lack of perfect charts was driving me crazy.

But the stock market slapped me right in my face the very next day as it slammed FNDT almost 3%. That was enough to officially kill the beautiful chart. Well it was still beautiful but the chances of failure rose. And sure enough come Friday the stock closed below the 50 day moving average on heavy volume a clear signal to sell almost all of it. I am now holding 25% in my regular accounts since I went long on 11/1. But the buy in my IRA on 11/6 has been completely sold. So that now makes the last three longs in my IRA all losers. And with FNDT failing (it had such a nice chart and extremely strong fundies with good estimates) it was one of my last hopes that this bull market was not over finally being destroyed. As this five year bull market appears to be ending, I am slowly coming to the acceptance that it is over.

My final hope that the bull market was not over yet came on Thursday night as I did my scans. I happened to come across a stock that had a 99 EPS rating and had some great fundamentals overall once I started to delve deeper into this stocks story. Not only were the fundamentals incredible for EXLS the chart was very long and the right side seemed very sound with the slight accumulation and green BOP spread about. The best thing about the chart seemed to be that the RS line was leading the price into new high grounds by such a great margin that if the market was putting in lows (which I was not sure if it was or not because the leaders were just cracking and I was not sure a short-term oversold rally was going to happen or not) this stock would explode higher. So I even went long quite a bit despite the weak market because this stock looked so good.

But proving once and for all that being long is now completely wrong, the stock gapped slightly and sold off all day long ending just slightly off its LOD. Just like FNDT, this was a complete sale as it immediately reversed the breakout. Now since I follow my rules hardcore, I still own 20% of this long for my accounts and 25% in the Conservative CANSLIM port on our website since it did not close below the 50 day moving average/24.71 level. But back in the old days I would definitely have sold it all by now and I recommend that if you have a smaller portfolio that you sell all of it. This stock was so pretty on Thursday, despite the nasty market selloff. If this stock would have rallied off of an oversold bounce the gains would have been great and might have produced a great stock. In a bull market this chart pattern in a stock with this kind of fundamental power in EPS and sales growth would produce 80% plus gains (80% is the move off the closing lows in July to the highs in November). However, a stock that fails this kind of super strong nice pattern is definitely in the wrong market environment. Sadly, for the stock, it takes a perfectly amazing pattern that would have rocked in a bull market and throws it the ground and kicks it in the gut. How rude!!

Is it possible that the market could put in a huge bullish reversal on Monday and then give us a follow-through day four days later? Of course it is. Anything can happen in the stock market. That is why you must never marry the bullish or bearish side. You must always stay flexible. I will tell you this though, if we do get a follow through in the next five days, it is going to take months to produce hot charts. There are very few charts that look like NYX. And before NYX becomes a new long it is going to need to move sideways to slightly higher a bit longer as it is still too deep in its basing pattern from the November 2006 highs.

Some of the reasons why I personally think that we will not bottom any time too soon is because no matter how many people say that there is fear out there I do not see it. I did see that the AAII bear ratio hit 50% which is high but I have seen the Investors Intelligence numbers recently and I believe that is at 22% right now. At the lows in August it was 35% bears and 45% bulls. With the bulls also at 55% right now, I doubt we are at the lows right here. Even at the February lows the bears hit 30% so I am not sure how there can be too much fear in the market right now. On the realmoney.com site I see 35% are bullish and 41% are bearish. In August the bears hit 60% and the bulls hit less than 25% so this bull/bear survey is off the bottom mark too.

But the most important sentiment indicators, imo, are the ones where actual money is put on the line. In that case, the put/call ratio is always one of my favorites to look at. One of the most interesting things I saw this week was that on Wednesday when the market sold off the put/call went from .96 to .90 CLEARLY signaling that there was absolutely no panic put buying during the selloff. That was another bearish warning that something bad was coming. Well on Thursday the ratio spiked up to 1.10. But then on Friday with the Nasdaq falling 2.5% and the IBD 100 falling 3.2% the put/call ratio actually fell from 1.10 to 1.03!! It is simply stunning that an index can selloff 2.5% and the options players bet against the trend and buy the dips since that is what they have been used to since October 2002. The put/call ratio dropping two of three down days this week despite the selloff is the most clear indication that there is no fear out there in actual market players.

The last place to look for fear is the VIX index. The VIX did increase 33% the past three days and that is a major development but just as there was no real fear in the selling in February there is no real fear in this selling right now either. The lows in August were put in once VIX got over 35. What proves my point that the big money is made with a high VIX, the rally that followed produced many brand new longs that made 25-100% gains in three months or less. If the VIX would have gotten over 50, we would have had a ton of 50%-200% gainers. That is how the VIX works. The higher the VIX the more money we make in our longs. The higher the VIX the worse the selloff is to give us fewer stocks to focus on. The few stocks that produce hot pretty green charts always become our new longs that give us huge fast gains.

Right now, the VIX is at 28.50 and until the VIX gets to 35 there is no way that we can even begin to talk about a market that is too oversold and needs to bounce because the market has gotten too bearish too fast. No matter what the talking fundamentalist blind-traders say on CNBC, you must follow your charts and listen to their silent voices. The charts speak louder and more truth than any analyst on TV or on the radio ever will. Those who told me to buy banks all the way down the past few months could have saved their clients a bunch of money if they would have learned to use charts. God bless Don Worden and his TC2007. I don't know what I would do without it. Without it, I wonder if there even would be any stock market commentary by me. This is the greatest way to make a living. Definitely one of the hardest. But still one of the best ways to make an honest dollar!

Aloha and I will see you in the chat room where no matter what market direction we are in we always stay in control and make money (except for this week--it sure was painful; ouch!). ALOHA!!!!

Sunday, November 04, 2007

Stocks ended slightly higher, with the Nasdaq leading the way, as stocks pretty much stayed range bound intraday. The boring trading looks rather tame and unreadable at first glance. But when you consider the selloff we had the day before, it has to be taken as a bullish sign that all indexes closed near the top of their intraday range after selling off initially during the day. So, overall, I would think that we have to consider today bullish considering that the selling had no follow-through and the indexes closed higher.

Confirming the strength in the market was the IBD 100 which rallied 1.2% which was much better than the indexes .1% to .6% gains. This also helped the IBD 100 close up for the week by .6% which well outpaced all the indexes which all fell this week between .25% and 1.7%. The weak week can be taken as bearish by most since we saw the NYSE pop up with two distribution days and new lows constantly beat new highs all week. Even on Friday when the indexes closed higher, the new lows beat the new highs on all indexes. On the Nasdaq it was 58 new highs to 251 new lows, on the NYSE it was 90 new highs to 205 new lows, and on the AMEX it was 30 to 35. So even strong days now have more selling than buying underneath the big cap large stocks.

What some don't seem to understand at this point in the rally is how the market can be rising when so many stocks are breaking down or hitting lower lows. It is simply, really. There are seven stocks that make up 25% of the Nasdaq. MSFT, GOOG, CSCO, AAPL, INTC, ORCL, AMOV each represent 2% or more of the Nasdaq individually. So technically you could have every single stock in the Nasdaq selloff and as long as these seven stocks rallied by a very large amount the index would still close higher. This is why GOOG, RIMM, AAPL, and BIDU are holding us up. These leaders are holding the whole market up. When they go, the market will go.

But while we wait for that to happen, we still have a lot of stocks that are moving higher and enjoying this overall uptrend by the stock market. HMSY, SXE, ATRO, and OTEX are just some of the stocks that are still moving much higher while everyone keeps trying to short every uptick. There have been some great shorts out there in the banks, finance, homebuilders, mortgage, and insurance stocks. But these still don't even come close to matching the returns of top stocks in this market. As long as this overall trend of the market is up, no matter how many stocks are moving lower, it still pays to be long top leading stocks with great growth in their fundamentals. These stocks are still moving up and producing bigger gains than most shorts are producing currently. Until the big boys (GOOG RIMM AAPL BIDU) break, I am continuing to fire my bullets on the long side.

I also have sentiment moving in my favor. With oil rising and hitting $96 a barrel on Friday I guess that helped spook investors, along with the intraday drop in the market, because the put/call ratio ROSE from .94 on Thursday to .99 on Friday. For those of you not familiar with this contrarian gauge it usually works best to do the opposite of what these players are doing. Normally when the markets rise, the put/call false as more players buy calls betting on even higher prices. The fact that prices rose YET more people bought bearish puts shows that sentiment is NOT bullish. Especially when over 40% of those polled by the NY Times in October say that we ARE IN a recession!???! Are you kidding me?

The network news and CNN's blatant bias and lies about this economy is helping this stock market rise. They are creating the wall-of-worry that is necessary for stocks to rise. That is why the stock market is near all-time/seven year highs, despite "this economy being a mess due to George Bush's tax cuts." Give me a f****** break. This is the greatest story never told. 3.9% GDP is NOT a recession. Wake up liberals! The facts are waiting for you to discover them. Lower taxes always equals more revenue for the government when you cut capital-gains and income taxes. Saying anything else is a direct attack on good, honest, common sense filled Americans.

Another thing that attacks my common sense is all these market top callers. I am finding top callers everywhere. DRYS - top. China - top. USA - top. I am going to repeat, one more time, do NOT look for tops. Ride the trend higher and when your stocks start going on climax runs where they start making huge price gains in an almost straight up fashion start taking profits. Only after your stock has topped, closed below the 50 dma, and has either failed to rally back above the line or has rallied back above and then failed right back below should you consider selling all of your big winners. The other clear sell area is the 200 day moving average. I almost will never hold a stock that trades below the 200 day moving average. This did get me out of AAPL early. But big deal. I am still holding longs like IHS, MA, and OMTR which are well above their 50 dmas and are still in very strong uptrends. I have taken plenty of profits in these along the way up but in NO WAY would I ever lose my stake until that 200 dma is broken.

In IHS, for instance, I know many who sold all in March 2006 due to the way it was acting. Then it was May 2007 and then August 2007. The fact of the matter is when you have a big winner with great fundamentals you should never sell the whole thing as long as it is above the 200 day moving averages. The best and biggest winners will never go below this line. Or if they do they will rally back quickly, like AAPL did. Even GOOG broke the 200 dma. But if you notice it never sold off on heavier volume ever while it was under the 200 dma. If you look at BIDU you will see that this winner met its 200 dma in August 2006, March 2007, and April 2007 but never broke it. Just another example of the 200 dma supporting the leading stocks. One more is TNH. This is a high-growth chemical leading stock (still is leading). As you will see it bounced right off the 200 dma in August.

Back to the current market, we are still in a solid uptrend off the August 16 lows and our August 29 follow-through with plenty of leaders doing just fine. But we do have to realize that we are very extended with many leading stocks well above their 50 day moving averages. Stocks like DRYS and EXM are over 100% extended and that is pretty far. So some more consolidation here wouldn't be bad for the stock market. Going up everyday is not the healthiest thing for markets. Low volume pullbacks are violent and fast mini-crashes on huge volume are what is needed to help stocks setup in proper bases so that we can get more leading stocks to break out of sound bases. Right now, we have very few great looking charts out there.

The last great looking chart was in a very speculative issue and it has already lost its luster. For those that are not familiar with APPY go back and look at it on your tc2007 software. Study that price, volume, and BOP. This is what we are looking for in all of our longs. FNDT is one of the nicest longs we have had in a while for a CANSLIM candidate but the lack of max green BOP right before this bounce is a bit discouraging. Still we, at least, have some pretty charts out there. We are just completely void of perfect charts. That is probably due to this rally being five years old. Though I remember when FMDAY bounced at the end of 2003 before going on that huge run. That was the end of the 2003 bull. But still. That was just a minor break in this longer bull market in this great market. The greatest story never told. This is truly as Kudlow says "a Goldilocks economy."

Until this market rolls over and the leading stocks all breakdown like GRMN (which STILL hasn't OFFICIALLY topped yet--it could easily rally back to new highs and run to $150) there is no way I am jumping off the bull train. I will poke a short here and there and hope I get more FAF, SHOO, COH, and CLP type of stocks. But will not look to go for broke on the bear side until those leading horseman die. Until they die, the longs are where the big money is at. You don't believe that to be the case? Well how do you explain what is below? I know. It is a very bullish market and leading stocks are getting rewarded in a very lucrative way.

Aloha and I will see you in the chat room where you can guarantee that I will be there and in control no matter how rough or big the waves get...this, however, is unlike my real-world surfing skills. Have a wonderful weekend.

Professional Stock Market Investor

I am a professional active-investor in the stock market, run my own website. I have been using a combination of the CANSLIM method with my own style of momentum investing to profitably trade my account and a few friends accounts for over twelve years. I was previously employed at a hedge-fund in NYC before moving to the most beautiful place in the USA. I love my work and I love my life. It, seriously, doesn't get any better than this.